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Bond King Gross Dumped US Treasuries as Yields Fell

Thursday, 16 Sep 2010 10:46 AM

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., reduced holdings of government-related debt for a second consecutive month in August as Treasury yields fell to a 19-month low.

The $248 billion Total Return Fund’s investment in the debt was cut to 36 percent of assets in August, from 54 percent the previous month, according to the website of Newport Beach, California-based Pimco. That equaled the lowest amount since April. The fund also boosted mortgage debt to 21 percent from 18 percent, the most since September 2009. Pimco doesn’t comment directly on monthly changes in portfolio holdings.

Yields on benchmark Treasury 10-year notes tumbled in August as concern increased that the U.S. economic recovery was faltering and speculation increased that the Federal Reserve would increase purchases of government assets. Prices of Treasures have declined for the past three weeks after a report showed private employers added more jobs in August than forecast by analysts.

The Total Return Fund has returned 11.09 percent in the past 12 months, beating 67 percent of its peers, according to data compiled by Bloomberg. It gained 0.60 percent over the past month, a performance superior to 58 percent of competitors. Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.1 trillion of assets as of June 30.

Pimco’s U.S. government-related debt category can include conventional and inflation-linked Treasuries, agency debt, interest-rate derivatives, Treasury futures and options and bank debt backed by the Federal Deposit Insurance Corp., according to the firm’s website.

High-Yield Holdings

The yield on the 10-year Treasury note fell 44 basis points last month. The yield dropped on Aug. 25 to 2.4158 percent, the lowest level since January 2009. The yield rose 4 basis points today to 2.72 percent.

Gross kept his high-yield holdings steady at 4 percent, and increased non-U.S. developed debt to 6 percent from 5 percent. It increased its net cash-and-equivalent position to 2 percent from negative 12 percent.

As Pimco cut government holdings for the second straight month, the firm made an $8.1 billion wager that the U.S. won’t suffer a decade of deflation like the one that crippled Japan starting in the 1990s.

That’s the notional value of long-term derivative contracts tied to the U.S. consumer price index that Pimco’s mutual funds entered into during the first half of this year, according to a regulatory filing. The funds received $70.5 million in up-front premiums under these contracts, known as inflation floors, in return for agreeing to pay investors should prices decline in the 10 years ending in 2020.

Deflation Wager

“We think the possibility that the U.S. goes 10 years with stagnant or falling prices is remote,” Mihir Worah, the head of Pimco’s real return portfolio management team, said in an e- mailed response to questions. “The options were priced at rich levels to the underlying” risk, added Worah, whose funds invest in Treasury inflation protected securities.

With U.S. unemployment stuck near 10 percent and consumer prices rising just 1.2 percent for the 12 months ended in July, investors have been seeking financial products that would protect their holdings from deflation.

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Bill Gross, who runs the world s biggest bond fund at Pacific Investment Management Co., reduced holdings of government-related debt for a second consecutive month in August as Treasury yields fell to a 19-month low. The $248 billion Total Return Fund s investment in the...
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2010-46-16
Thursday, 16 Sep 2010 10:46 AM
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